On May 29, 2020, in Constr. Drilling, Inc. v. Engineers Constr., Inc., the Vermont Supreme Court upheld a trial court’s judgment in favor of general contractor on an extra work payment dispute. The Supreme Court agreed with the trial court’s conclusion that the subcontractor had encountered a change in the work, but the subcontractor’s failure to provide notice of the change or adhere to the required subcontract change order request procedure waived its entitlement to a cost adjustment. The subcontractor tried and failed to convince the court that the subcontract provision entitling it to a cost adjustment should be interpreted independently from the standard change order request provision. The Supreme Court also upheld the award of attorneys’ fees to the general contractor as the prevailing party pursuant to the Vermont Prompt Payment Act.
The dispute arose from a contract for a railroad-bridge reconstruction project in Hartford, Vermont. ECI, the general contractor on the project, hired CDI as a subcontractor to install micropile foundation supports. The lump sum subcontract incorporated the subcontractor’s proposal as “an integral part” of the agreement. The proposal included a provision allowing for a price adjustment on a time and materials basis for costs associated with “drilling through obstructions.” The proposal did not include a mechanism for such adjustment, but, elsewhere, the subcontract terms and conditions provided that the subcontractor could request a change order for changes causing an increase in price. Under the change request language, the subcontractor could not proceed with change work until receiving an approved change order.
After drilling to the design depth for one of the piles, the subcontractor’s drill became stuck. The subcontractor spent weeks trying to free the drill but never provided notice to the contractor that the subcontractor believed the issue with the stuck drill related to “drilling through obstructions.” The contractor’s superintendent testified that, if he knew the subcontractor intended to seek costs for freeing the drill, he would have issued a stop work order and directed the subcontractor to drill a new hole for the pile at a cost of only $10,000. After finally freeing the drill, the subcontractor billed the contractor for $120,000 in additional charges. The trial court found that the subcontractor’s drill became stuck due to obstructions entitling the subcontractor to a change, but, because the subcontractor failed to notify the contractor or request a change order prior to performing the additional work, the contractor was not liable for the resulting costs of freeing the drill.
The subcontractor appealed arguing that the trial court erred in holding that the terms of the subcontract required the subcontractor to request a change order before it incurred costs on the change work. The subcontractor contended that the subcontract unambiguously allowed it to bill for excess costs for “drilling through obstructions” without submitting a change order request. The Vermont Supreme Court refused to interpret the proposal language providing for costs from “drilling through obstructions” in isolation. Seeking to harmonize the terms of the subcontract, the court agreed with the contractor that the subcontract required submission of a change request prior to performance of any extra work.
The incorporation of the general contract terms into the subcontract also persuaded the court that the change request requirement must be an essential element of the subcontractor’s entitlement to costs. By incorporating the general contract terms, the contractor “made explicit to [the subcontractor] both the common purpose underlying the subcontract and the benefits [the contractor] expected to receive through the subcontract.” Extrapolating from the implied covenant of good faith and fair dealing inherent in every contract, the court reasoned that, by agreeing to incorporate the terms of the general contract, the subcontractor impliedly agreed to do nothing to undermine the contractor’s rights under its general contract with the owner.
Per the court, to pass on costs of any unforeseen subsurface conditions, the contractor had to provide the owner with notice before disturbing the conditions or continuing the work. The subcontractor’s failure to submit a change request prior to incurring costs to address the underground obstructions denied the contractor its right to pursue costs under the general contract. Lack of notice also prevented the contractor from mitigation efforts such as relocating the affected pile. The court also appeared to be swayed by fairness considerations as it explained:
The purpose of the subcontract between [the contractor] and [subcontractor] was to delineate how [the subcontractor] would complete one component of a much larger, dynamic project involving multiple variables and decision-makers, as well as an active train schedule. [The subcontractor] urges an interpretation of the subcontract which would turn this project-management scheme on its head, allowing a subcontractor—rather than the decision-makers designated in the subcontract and the contract—to unilaterally control the cost and schedule of the project. Under [the subcontractor’s] view, it could incur costs more than ten times the cost of drilling a new hole and roughly 50% above the contract price without any request for a change order.
What are the takeaways from this decision?
Decision makers in construction disputes frequently struggle with contract interpretation and discerning the intent of the parties. Most complex construction projects include multiple layers of contracts such as subcontracts, sub-subcontracts, supply agreements, architect-engineer agreements, etc. These contracts often interrelate through reference to one another or the flow down of specific terms and conditions, which can confuse obligations between particular parties. Moreover, each agreement may be composed of stock terms and conditions that are altered or rendered ambiguous by contradictory language in attachments such as a statement of work or a proposal.
Navigating these various competing agreements and provisions when a dispute arises on a project can be a messy affair. When considering defending or pursuing a claim, it is worthwhile to think through the plain textual or unambiguous meaning of applicable contract terms and how conflicting or inconsistent terms may be interpreted by an arbitrator or judge in light of the factual circumstances of the dispute. If an ambiguity allows a decision maker to get to what he or she perceives is a more equitable result, that carefully worded provision you built your claim or defense upon may not hold up.